IDEAS home Printed from https://ideas.repec.org/a/tpr/restat/v89y2007i2p247-264.html
   My bibliography  Save this article

Is There a Retirement-Consumption Puzzle? Evidence Using Subjective Retirement Expectations

Author

Listed:
  • Steven J. Haider

    (Department of Economics, Michigan State University)

  • Melvin Stephens

    (H. John Heinz III School of Public Policy and Management, Carnegie Mellon University, and National Bureau of Economic Research)

Abstract

Previous research finds a systematic decrease in consumption at retirement, a finding that is inconsistent with the life cycle/permanent income hypothesis if retirement is an expected event. In this paper, we use workers' subjective beliefs about their retirement dates as an instrument for retirement. After demonstrating that subjective retirement expectations are strong predictors of subsequent retirement decisions, we still find a consumption decline at retirement for workers who retire when expected. However, our estimates of this consumption fall are about a third less than those found when we instead rely on the instrumental variables strategy used in prior studies. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Steven J. Haider & Melvin Stephens, 2007. "Is There a Retirement-Consumption Puzzle? Evidence Using Subjective Retirement Expectations," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 247-264, May.
    • Handle: RePEc:tpr:restat:v:89:y:2007:i:2:p:247-264
    as

    Download full text from publisher

    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/rest.89.2.247
    File Function: link to full text
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hugo Benítez-Silva & Debra S. Dwyer, 2003. "What to Expect when you are Expecting Rationality: Testing Rational Expectations using Micro Data," Working Papers wp037, University of Michigan, Michigan Retirement Research Center.
    2. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    3. B. Douglas Bernheim, 1989. "The Timing of Retirement: A Comparison of Expectations and Realizations," NBER Chapters, in: The Economics of Aging, pages 335-358, National Bureau of Economic Research, Inc.
    4. Jeff Dominitz, 1998. "Earnings Expectations, Revisions, And Realizations," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 374-388, August.
    5. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-788, September.
    6. repec:fth:jonhop:390 is not listed on IDEAS
    7. F. Thomas Juster & Richard Suzman, 1995. "An Overview of the Health and Retirement Study," Journal of Human Resources, University of Wisconsin Press, vol. 30, pages 7-56.
    8. Angrist, Joshua D. & Krueger, Alan B., 1999. "Empirical strategies in labor economics," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 23, pages 1277-1366, Elsevier.
    9. Hamermesh, Daniel S, 1984. "Consumption during Retirement: The Missing Link in the Life Cycle," The Review of Economics and Statistics, MIT Press, vol. 66(1), pages 1-7, February.
    10. B. Douglas Bernheim & Jonathan Skinner & Steven Weinberg, 2001. "What Accounts for the Variation in Retirement Wealth among U.S. Households?," American Economic Review, American Economic Association, vol. 91(4), pages 832-857, September.
    11. Carroll Christopher Dixon, 2001. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," The B.E. Journal of Macroeconomics, De Gruyter, vol. 1(1), pages 1-38, April.
    12. Jappelli, Tullio & Pistaferri, Luigi, 2000. "Using subjective income expectations to test for excess sensitivity of consumption to predicted income growth," European Economic Review, Elsevier, vol. 44(2), pages 337-358, February.
    13. V. Kerry Smith & Donald H. Taylor & Frank A. Sloan, 2001. "Longevity Expectations and Death: Can People Predict Their Own Demise?," American Economic Review, American Economic Association, vol. 91(4), pages 1126-1134, September.
    14. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318, Elsevier.
    15. Sydney Ludvigson & Christina H. Paxson, 2001. "Approximation Bias In Linearized Euler Equations," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 242-256, May.
    16. Lundberg, Shelly & Startza, Richard & Stillman, Steven, 2003. "The retirement-consumption puzzle: a marital bargaining approach," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1199-1218, May.
    17. Michael D. Hurd & Kathleen McGarry, 2002. "The Predictive Validity of Subjective Probabilities of Survival," Economic Journal, Royal Economic Society, vol. 112(482), pages 966-985, October.
    18. Lundberg, Shelly & Startza, Richard & Stillman, Steven, 2003. "The retirement-consumption puzzle: a marital bargaining approach," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1199-1218, May.
    19. Richard Disney & Tanner, Tanner, 1999. "What can we learn from retirement expectations data?," IFS Working Papers W99/17, Institute for Fiscal Studies.
    20. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
    21. Michael D. Hurd & Susann Rohwedder, 2003. "The Retirement-Consumption Puzzle Anticipated and Actual Declines in Spending at Retirement," Working Papers DRU-3009, RAND Corporation.
    22. Little, Roderick J A, 1988. "Missing-Data Adjustments in Large Surveys," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(3), pages 287-296, July.
    23. Engen, Eric & Gale, William & Uccello, Cori, 1999. "The Adequacy of Household Saving," MPRA Paper 56442, University Library of Munich, Germany.
    24. Kathryn H. Anderson & Richard V. Burkhauser & Joseph F. Quinn, 1986. "Do Retirement Dreams Come True? The Effect of Unanticipated Events on Retirement Plans," ILR Review, Cornell University, ILR School, vol. 39(4), pages 518-526, July.
    25. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-481, March.
    26. Mark Aguiar & Erik Hurst, 2004. "Consumption vs. Expenditure," NBER Working Papers 10307, National Bureau of Economic Research, Inc.
    27. Michael D. Hurd, 1992. "Wealth Depletion and Life-Cycle Consumption by the Elderly," NBER Chapters, in: Topics in the Economics of Aging, pages 135-162, National Bureau of Economic Research, Inc.
    28. John Ameriks & Andrew Caplin & John Leahy, 2007. "Retirement Consumption: Insights from a Survey," The Review of Economics and Statistics, MIT Press, vol. 89(2), pages 265-274, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Erik Hurst, 2004. "Grasshoppers, Ants and Pre-Retirement Wealth: A Test of Permanent Income Consumers," Working Papers wp088, University of Michigan, Michigan Retirement Research Center.
    2. Kohei Kubota & Mototsugu Fukushige, 2016. "Rational Consumers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(1), pages 231-254, February.
    3. Erik Hurst, 2008. "The Retirement of a Consumption Puzzle," NBER Working Papers 13789, National Bureau of Economic Research, Inc.
    4. Luigi Giamboni & Emanuele Millemaci & Robert J. Waldmann, 2013. "Evaluating how predictable errors in expected income affect consumption," Applied Economics, Taylor & Francis Journals, vol. 45(28), pages 4004-4021, October.
    5. David M. Blau, 2008. "Retirement and Consumption in a Life Cycle Model," Journal of Labor Economics, University of Chicago Press, vol. 26(1), pages 35-71.
    6. Erik Hurst, 2003. "Grasshoppers, Ants, and Pre-Retirement Wealth: A Test of Permanent Income," NBER Working Papers 10098, National Bureau of Economic Research, Inc.
    7. Li, Hongbin & Shi, Xinzheng & Wu, Binzhen, 2016. "The retirement consumption puzzle revisited: Evidence from the mandatory retirement policy in China," Journal of Comparative Economics, Elsevier, vol. 44(3), pages 623-637.
    8. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2006. "Are Americans Saving "Optimally" for Retirement?," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 607-643, August.
    9. Alessandro Bucciol, 2006. "The Roles of Temptation and Social Security in Explaining Individual Behavior," "Marco Fanno" Working Papers 0032, Dipartimento di Scienze Economiche "Marco Fanno".
    10. Michael D. Hurd & Susann Rohwedder, 2006. "Some Answers to The Retirement-Consumption Puzzle," Working Papers WR-342, RAND Corporation.
    11. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    12. Susann Rohwedder & Arthur van Soest, 2006. "The Impact of Misperceptions about Social Security on Saving and Well-being," Working Papers wp118, University of Michigan, Michigan Retirement Research Center.
    13. Michael D. Hurd & Susann Rohwedder, 2005. "Changes in Consumption and Activities in Retirement," Working Papers wp096, University of Michigan, Michigan Retirement Research Center.
    14. Stephens, Melvin & Unayama, Takashi, 2012. "The impact of retirement on household consumption in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(1), pages 62-83.
    15. Almudena Sevilla-Sanz & Maria Jose Luengo-Prado, 2010. "Consumption, Retirement and Life-cycle Prices: Evidence From Spain," Economics Series Working Papers 498, University of Oxford, Department of Economics.
    16. Hurd, Michael D. & Rohwedder, Susann, 2013. "Heterogeneity in spending change at retirement," The Journal of the Economics of Ageing, Elsevier, vol. 1, pages 60-71.
    17. Garry F. Barrett & Matthew Brzozowski, 2010. "Involuntary Retirement and the Resolution of the Retirement-Consumption Puzzle: Evidence from Australia," Social and Economic Dimensions of an Aging Population Research Papers 275, McMaster University.
    18. Bissonnette, L. & van Soest, A.H.O., 2010. "Retirement Expectations, Preferences, and Decisions," Other publications TiSEM 45e93b08-cc1d-47c6-ba06-d, Tilburg University, School of Economics and Management.
    19. Melanie Lührmann, 2010. "Consumer Expenditures and Home Production at Retirement – New Evidence from Germany," German Economic Review, Verein für Socialpolitik, vol. 11(2), pages 225-245, May.
    20. Kevin Huang & Frank Caliendo, 2011. "Rationalizing multiple consumption-saving puzzles in a unified framework," Frontiers of Economics in China, Springer;Higher Education Press, vol. 6(3), pages 359-388, September.

    More about this item

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tpr:restat:v:89:y:2007:i:2:p:247-264. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://direct.mit.edu/journals .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ann Olson (email available below). General contact details of provider: https://direct.mit.edu/journals .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.